Bankman-Fried of Special Report-FTX pleaded for help even as he exposed massive accounting flaws.

by Lawrence Delevingne, Angus Berwick, Anirban Sen, and Elizabeth Howcroft

Sam Bankman-Fried, the exchange’s founder, was working the phones on a crazy Sunday this month when clients withdrew billions of dollars from the exchange in a rush to get $7 billion in emergency funds.

According to three people familiar with the situation, Bankman-Fried worked all night dialling some of the world’s largest investors, including Sequoia Capital, Apollo Global Management (NYSE:APO) Inc., and TPG Inc.He was holed up in his Bahamas condo.

Only a few months before, Sequoia was one of the investors waiting in line to pour cash into the Bankman Empire. Fried is simply unavailable at this time.According to the sources, Sequoia was astounded by the sum of money Bankman-Fried required to preserve FTX, while Apollo initially requested additional details before declining. TPG and both companies chose not to comment for this report.

Ultimately, the calls were for nothing, and on November 11, FTX declared bankruptcy, leaving an estimated million consumers and other investors with total losses running into the billions of dollars. Bitcoin and other digital assets fell as a result of the crash, which rippled across the cryptocurrency community.

Some information about what transpired at FTX has already come to light. For instance, Reuters said that Bankman-Fried used $10 billion in customer cash covertly to support his trading firm and that at least $1 billion of those deposits had vanished.

Related: Bankman-Fried ‘100%’ supports knowledge tests for retail derivatives traders

The 30-year-old son of Stanford University professors, Bankman-Fried, has now revealed the most complete account of how he rose to become one of the richest men in the world in a matter of years through an analysis of dozens of company documents and interviews with current and former executives and investors.

Financial statements, business updates, company announcements, and letters to investors are among the records that are being disclosed online for the first time. They and the interviews make it clear that:

— Despite FTX’s assurances that Alameda Research operated independently, some of the same assets appeared on the balance sheets of both FTX and Bankman Trading Fried’s company in investor presentations at the same time.

— One of Bankman Fried’s associates modified the accounting programme at FTX.Bankman-Fried was able to conceal the client money transfer from FTX to Alameda as a result of this.A picture of FTX’s accounting software revealed that even after the significant customer withdrawals, there were still about $10 billion in deposits and a $1.5 billion surplus. Because of this, employees thought that FTX was financially stable when it wasn’t.

Over the years, FTX paid Alameda roughly $400 million in “software royalties.” FTX’s digital coin, FTT, had a decreased quantity, and its value was supported by Alameda’s use of the monies to purchase the coin.

FTX reported a loss of $161 million for the second quarter of this year. Meanwhile, Bankman Fried had invested about $2 billion in acquisitions.

In the frenetic last days of FTX, Bankman Fried sought emergency funding from financial behemoths in Saudi Arabia and Japan. His father, a law professor, also visited him at his Bahamas headquarters.

In an email to Reuters, Bankman-Fried claimed that Alameda’s leverage was far more than he had thought due to a “confusing internal account.” He noted that FTX handled customer withdrawals totaling almost $6 billion.

He said that FTX and Alameda combined produced a profit of nearly $1.5 billion in 2021, exceeding all of the organisations’ combined expenses since their inception. Because so much of what I put in Slack emerged on Twitter shortly after, he continued, “I was regrettably unable to relay much of what was happening to the larger firm in real time.”

FTX declined to comment when contacted about this report.

According to Reuters, the United States Department of Justice, Securities and Exchange Commission, and Commodity Futures Trading Commission are currently looking into FTX, including how it handled customer money. The slump has undermined investor faith in cryptocurrencies and prompted calls for more industry regulation from politicians and others. For this report, the CFTC and DOJ declined to provide comments. The SEC made no comment.

A Bahamian Life

Bankman-Fried was born in 1992 and spent his childhood close to Stanford University’s Palo Alto campus, where both of his parents were faculty members at the law school. He ended up at the Massachusetts Institute of Technology, where he majored in math and physics and adopted the movement known as effective altruism, which urges people to give to charity first.

He accepted a position with a quantitative trading company on Wall Street in 2014 after receiving his degree from MIT. Three years later, Bankman-Fried established Alameda Research, calling it “a crypto quant trading firm.”

According to a profile that subsequently appeared on the website of FTX investor Sequoia, he cobbled together loans and assembled a team of young traders and programmers, many of whom slept and worked in a small walk-up apartment in the San Francisco area. He was initially rejected by venture investors.

According to the same description, Alameda achieved early trading success by arbitraging cryptocurrency prices on global markets, with half of proceeds going to charity. According to a company pamphlet from Alameda, the company handled $55 million in client payments by 2019.Reuters was unable to independently verify these specifics.

The brochure warned about the risks of trading cryptocurrencies, including how sudden token sales could have a “domino effect” and cause a “cascading set of liquidity failures.” It also said that “nothing fundamental” supported the value of bitcoin.

2019 saw the introduction of FTX by Bankman-Fried using Alameda’s earnings. According to an FTX marketing brochure from earlier this year, his goal was to make an “FTX Superapp” that combined cryptocurrency trading, betting markets, stock trading, banking, and peer-to-peer and business payments.

His idea was the only thing that outpaced the company’s expansion during the following two years.

From $10 million in 2019 to $1 billion in 2021, FTX’s revenues increased. According to a document from September, FTX handled 10% of all cryptocurrency trading globally this year, up from nearly nothing in 2019. According to the document, it spent about $2 billion purchasing businesses.

(Graphics.reuters.com/FINTECH-CRYPTO/gdpzqyyxmvw/chart.png) Exponential growth

The corporation outlined its objectives for the following five to ten years in a paper that is undated and named “FTX Roadmap 2022.” It aimed to become “the largest worldwide financial exchange” by making more money than Fidelity Investments, which is the largest retail brokerage firm in the US.

Bankman-Fried, who was 29 years old at the time, appeared on the cover of Forbes in October 2021. Forbes estimated his net worth at $26.5 billion, making him the 25th richest person in America. “FTX, its affiliates, and its employees have donated over $10 million to help save lives, prevent misery, and secure a brighter future,” the company claimed on its website.

According to his personal finances, Bankman-Fried had a modest life for a billionaire. Reuters saw a financial document that said he owned $1 million worth of real estate, made $200,000 a year in pay, and spent $50,000 on personal expenses in 2021.

His lifestyle in the Bahamas, however, was more opulent than his financial situation indicated. Two FTX employees say that he once lived in a penthouse that was worth more than $40 million and had a view of the Caribbean.

According to Bankman-Fried, he lives with nine other coworkers in a house. He said that FTX offered complimentary lunches to its staff members and a “in-house Uber-like” transportation service all over the island.

“Final Source of the Truth”

FTX seems to have been prevalent at the beginning of this year.

Its logo is on the jerseys of Major League Baseball umpires and on a big sports arena in Miami.Celebrities and athletes, such as Tom Brady, Gisele Bundchen, and Steph Curry, joined together to promote the business. For this article, none of them left comments. As a frequent visitor to Washington, Bankman-Fried lobbied lawmakers on cryptocurrency markets and gave tens of millions of dollars to political candidates.

FTX also had plans to collaborate with some of the biggest businesses in the world. An unreported FTX document from June 2022 lists a number of FTX’s “chosen partners” for business-to-business (B2B) services. According to the document, potential collaborators included financial website Yahoo! Finance, payment system provider Stripe, social media juggernaut Meta Platforms Inc., and retail behemoth Walmart (NYSE:WMT) Inc.

While we were in the very early stages of a potential relationship with FTX, nothing was nearing completion when the events of last week occurred, according to a Yahoo spokeswoman.

According to a source with knowledge of the situation, Stripe and FTX do not have a contract allowing Stripe users to make cryptocurrency payments. A request for comment regarding a possible partnership between FTX and Walmart for employee investing received no response from Walmart. Meta didn’t say anything when people talked about FTX being an Instagram user’s digital wallet provider.

The ambition of Bankman-Fried won over investors. More than $2 billion had already been invested in FTX by investors like Sequoia, SoftBank Group Corp., BlackRock Inc. (NYSE:BLK), and Temasek. FTX raised an additional $400 million in January, valuing the company at $32 billion.

According to a June investor due diligence document, FTX planned to go public with both its domestic and overseas operations. This is the first time the document has been reported.

When he was at the top of his power, Bankman-Fried asked the cryptocurrency business to help governments write laws to regulate it. He said that FTX’s goal was to become “one of the most regulated exchanges in the world.”

According to corporate documents and individuals briefed on FTX’s finances, Bankman-Fried had used client monies to pay for some of his projects, which was the secret he maintained from the majority of other employees behind his quick growth. The exchange’s terms of service said that user deposits “must always stay with you,” which made it clear that this was not allowed.

According to records obtained by Reuters, FTX made 2 cents in fees for every $100 in trades, bringing in hundreds of millions of dollars by 2021. Nevertheless, in its first two years, 2019 and 2020, FTX barely made a profit. In 2021, when the cryptocurrency market was booming, it made around $450 million in profit, but in the second quarter of this year, it suffered a $161 million loss, according to financial records that are being disclosed here for the first time.

According to the three FTX insiders briefed on the company’s finances, a portion of the $10 billion in deleted customer funds went to pay losses incurred by Alameda earlier this year on a number of bailouts, notably the failing crypto lender Voyager Digital.

Additionally, FTX provided funding for acquisitions, such as the $640 million interest in trading platform Robinhood Markets Inc. that was acquired in May. (NASDAQ:HOOD). A request for feedback from Robinhood received no response.

Without providing any information, Bankman-Fried told Reuters he didn’t think Alameda had significant losses, including on Voyager.

According to Reuters, approximately $1 billion of the $10 billion total is not included in Alameda’s assets. These lost funds have not been found, according to Reuters.

Only a select group of Bankman associates, including Fried’s co-founder and chief technology officer Gary Wang, the head of engineering Nishad Singh, and Caroline Ellison, CEO of Alameda, were informed of his use of client deposits, according to the three FTX sources. Bankman-Fried and Wang previously collaborated at Alameda.

Requests for responses from Wang, Singh, and Ellison were not responded to.

The people said that Wang, a former Google (NASDAQ:GOOGL) software developer, used a backdoor in FTX’s book-keeping software to hide the transfers of customer monies to Alameda.

According to two of the employees, Bankman-Fried frequently referred to the bookkeeping system as “the ultimate source of truth” in the company’s accounting. But according to them, Alameda was able to remove cryptocurrency deposits by using a backdoor that was only known to his closest lieutenants.

Another weakness of FTX was its proprietary cryptocurrency.

Staff members could choose to receive pay and bonuses in the token, which FTX introduced shortly after its launch and referred to on its website as the exchange’s “backbone.” Many of them amassed fortunes in the token as its value exploded in 2021, according to the three current and former executives. One CEO said that, “out of loyalty to Sam,” they had put all of their savings into FTT, which was worth millions of dollars.

According to the company’s financial documents and a due diligence report Bankman-Fried delivered to a prospective investor in June 2022, FTX has paid $400 million in “software royalty” payments for development work to an Alameda subsidiary since 2019. The price went up because the subsidiary bought FTT with the money and made less digital tokens available.

On its website, FTX made it clear that it was purchasing FTT in part through trading commissions. It kept the agreement with Alameda a secret.

According to a balance sheet subsequently released to investors, over the years, Alameda built a sizable position in FTT, worth almost $6 billion before last week. According to those knowledgeable about its affairs, it secured corporate loans using the FTT reserves. This implied that the token was essential to banker-corporation Fried’s empire.

That obscure holding proved to be Bankman’s downfall. Fried’s

Pressure develops.

Alameda’s dependence on FTT was revealed in a balance statement that was leaked, according to news source CoinDesk, on November 2. The leader of the biggest cryptocurrency exchange in the world—Bankman Main’s rival—seized upon that report. Changpeng Zhao, the CEO of Binance, said that all of Binance’s FTT shares would be sold because of “risk management” and “new disclosures.”

Bankman-Fried responded on Twitter, calling Zhao’s claims “false rumours” and adding: “FTX has enough to support all client holdings.” “We do not invest client funds.”The message has since been deleted.

Nevertheless, FTT faced strong selling pressure, causing Alameda to increase its purchase of the tokens in an effort to keep the price stable, according to a person with knowledge of the transactions. According to corporate documents seen by Reuters, customers panicked and rushed to withdraw money from FTX, with over $100 million leaving the company each hour that Sunday.

“To my knowledge, Alameda did not buy very much FTT during the downturn to stabilise it,” Bankman-Fried wrote in an email to Reuters.

The staff was at first unperturbed. As of last week, the finance staff could still see a lot of assets on the bookkeeping portal. Reuters saw a screen shot of a database that showed that there were still about $10 billion in client deposits and another $1.5 billion to cover any future withdrawals.

These funds were indeed gone.

Zhao met his lieutenants Wang and Singh at his apartment several hours after his Sunday tweet to come up with a strategy, according to Bankman-Fried, who spoke to Reuters. That evening, he sent a Slack message to the team, saying it had been a “tough weekend,” but “we’re chugging ahead.”

The next day, he invited Wang, Singh, and a number of other senior managers to his house. He informed them that FTX was running low on funds.

This description of the rush that followed is based on what Reuters learned from looking at papers and talking to three current and former FTX executives who were told by top staff.

Because customer deposits had been transferred to Alameda and primarily used for other assets, Fried’s bankman-spreadsheets to the management showed a $10 billion deficit in FTX’s accounts. They were astonished, the execs. One of them told Bankman-Fried that what FTX told the authorities about how it used customer money was different from what the spreadsheet showed.

They estimated that Alameda could quickly sell about $3 billion of the assets, mostly cash stored in business trading accounts on other cryptocurrency exchanges, to cover the difference. Due to the difficulty of trading certain assets, the remainder would take days or weeks to sell. To survive, FTX urgently required an additional $7 billion in cash.

Bankman-Fried then started looking for a saviour.

He and his assistants worked through the night, reaching out to about a dozen possible investors as money continued to flow away from FTX, according to the three sources who spoke to Reuters.

He also went to the cryptocurrency community, calling the company that runs Tether, the biggest stablecoin in the world, and requesting a loan. Professor of Stanford Law Joseph Bankman, his father, also showed up to give his son advice. An inquiry for comment from Bankman was not answered. In exchange for funding, Bankman-Fried promised investors the majority of Alameda’s assets, including its stake in FTT and his own 75% stake in FTX.But nobody actually made an offer.

Without going into further detail, one of the investors who rejected Bankman-Fried claimed that his numbers were “very amateurish.” The spreadsheets’ connections between FTX and Alameda, the investor claimed, were another issue.

Around three in the morning, Bankman-Fried turned to Zhao, his adversary at Binance. Zhao, often referred to by the initials CZ, arrived at the phone. A non-binding letter of intent to purchase FTX.com was sent over by Zhao a few hours later, and Bankman-Fried signed it. Later that morning, the two shared an announcement on Twitter.

The majority of FTX employees had no prior knowledge of the company’s catastrophic circumstances. The following day, Zane Tackett, the head of institutional sales at FTX, posted on Twitter, “Just pure disbelief and emotions of betrayal.” He chose not to respond.

Related: Sam Bankman-Fried talks about how FTX would handle a bid from Celsius. 

Tackett quit along with a few other people. Another member of the FTX crew texted teammates, “I can’t do it any more.”

To make matters worse, the price of the FTT token dropped by 80% in the three hours following the news, significantly depleting Alameda’s assets and wiping out the net worth of numerous employees. Watching it fall, said the CEO, who had millions invested in FTT, “was like witnessing my world decreasing.”

Less than 30 hours later, Binance withdrew, citing its due diligence, and Bankman-Fried begged for employees’ forgiveness on Slack, admitting that he “fucked up” but that the Binance offer let them “fight another day.” The $150 million that Sequoia had invested in FTX was then written off.

Bankman-Fried broadened his search for a saviour by travelling throughout the world. He told employees, “I’ll keep battling.”

According to a message he sent to advisors on Thursday and two other people familiar with the talks, he attempted to convince representatives at important financial institutions to invest, including the Public Investment Fund of Saudi Arabia and the Japanese investment bank Nomura Holdings (NYSE:NMR) Inc. Here is the first mention of such appeals. PIF and Nomura remained silent.

A number of cryptocurrency companies were also persuaded by Bankman-Fried to contribute $1 billion each. However, investors were alarmed when FTX provided them with a balance sheet showing barely $900 million in liquid assets, according to two people familiar with the situation.

By Friday, when FTX declared bankruptcy in the US, an executive claimed that “we were all doomed.”

FIGURE: Liquid assets of FTX (source: graphics.reuters.com/FINTECH-CRYPTO/byvrljjzbve/chart.png)

Less liquid assets of FTX are shown in the graph below (source: graphics.reuters.com/FINTECH-CRYPTO/gdvzqyyzmpw/chart.png).